What Consumer Spending Will Tell Us About the Economy

You probably know by now that whatever happens with the economy will flow into the markets.

So, keeping tabs on the economy forms the basis of my trading.

One of the easiest ways to do this is by looking at consumer spending, since it accounts for nearly 70% of GDP.

And next week, my full attention will be on two closely watched spending indicators…

Washing Machines, Computers, and Dryers

On Monday, data on the first indicator – durable goods – will be released. Then, on Tuesday the Redbook will be released.

From my experience, durable goods are the ones that economists watch more closely.

Durable goods are things like air conditioners, washing machines, computers, and dryers. That is, goods you might update every few years (or longer), especially if money is tight.

If demand for durable goods slows down, consumers might have less money in their pockets or consumer confidence is waning.

On the other hand, if durable good sales are climbing – even to the point of causing shortages in supply – that will mean confidence is high and consumers have plenty of money to spend.

Both of these scenarios tell you something about the economy… that’s why economists watch them.

However, the reason I watch durable goods is slightly different…

You see, most of the time durable goods meanders in a pretty tight range. Numbers typically range between plus or minus 5% (compared to the same time a year before).

However, that all changed with COVID-19, when sales fell off a cliff. They were down 16.6% in March 2020, and then down another 18.1% in April 2020…

Fortunately, they quickly recovered. After spiking back, it only took three months to make up for the loss. Since then, durable goods have steadily tracked along as usual.

The Trusty Redbook

I’ll be watching durable goods on Monday to compare the results with another consumption index – the Redbook.

I’m looking to see if the same pattern we saw in durable goods (reverting to the mean) could soon happen in consumer spending…

The Redbook uses data from around 9,000 general merchandise stores to measure year-over-year sales.

Because of its breadth across the retail sector, it provides great insight into spending trends. And, how that all fits into the broader economic cycle.

As consumers buy more products, those suppliers need to employ more people to match demand. In turn, they spend their wages to add more demand into the economy.

So, an increase in demand creates further demand – a simple economic cycle.

However, it works both ways. If employers start laying workers off, then that cycle reverses. Less demand can put a real handbrake on the economy.

That’s where the Redbook comes into play…

By measuring retail spending across the country, it helps gauge where we are in that economic cycle.

I’m watching to see if retail sales might also do what durable goods has done – start reverting to its average. That could have major ramifications for the economy…

The Redbook shows retail sales generally grow between zero to 5% a year. However, after falling to minus 12% in April 2020, it has been rising ever since.

More recently, retail sales have regularly grown by over 15% year-over-year. That’s around three to four times its long-term average.

So, I have to ask, is this sustainable?

A fall would indicate a slowdown in spending… and potentially a slowing economy.

If spending should revert to the mean (like durable goods), it could have dire results for the economy.

That’s why I’ll be watching durable good sales and the Redbook next week. Both will tell me a lot about how to gauge our economy.

I’ll be sure to let you know if anything stands out.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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